Office

What Office Tenants Want

Learn Which Factors Are Crucial in Office Space Decisions.

Despite the fluctuating economy and current design trends, two factors remain constant when tenants select office space: cost and location. But in today's market, other factors also influence the decision-making process. From turnkey buildouts to shorter lease terms to adaptive work space, office tenants want flexibility, functionality, and responsiveness.

Tenants also want value, and a down market is a good place to find it. Due to the abundance of office space in most markets and many companies' consolidation of their employees into fewer square feet, most tenants today are spending less for their space, says Barry Spizer, CCIM, principal of SRSA Commercial Real Estate in Metairie, La. An exception is small tenants that have less negotiating leverage, so their costs can be somewhat higher, he says.

In today's environment, offering the best financial deal is no longer enough to secure tenants, since many “are more than willing to spend the money in order gain operating efficiencies,” says Gregory C. Hobbs, CCIM, owner of Olympic Properties in Raleigh, N.C. Instead, landlords need to educate tenants (and potential tenants) about the space's footprint, the potential costs over and above the lease price, and other factors that help them “make the best decision they can make,” says Kimberly Surratt, a senior project designer at Dallas-based WorkPlaceUSA.

On the other hand, knowing what tenants are looking for helps landlords anticipate their needs and keep space filled. “Landlords working hardest to stay informed are the ones who will keep cash flow high,” says Norman G. Marquardson, CCIM, an agent with Prime Commercial in Midvale, Utah.

Ready for Change

“Flexibility seems to be the key word for the offices of the future because businesses are changing so fast,” says Michael Orr, architectural team leader and vice president of WorkPlaceUSA. Tenants view their companies as growing organisms, and they don't want spaces that inhibit growth. They prefer facilities that can be adjusted to fit their current and future business needs, from movable walls to buildouts.

“Landlords should remember to market their space as flexible,” Spizer says. Even if furniture already is in place, landlords should provide space-planning services to show how offices can be configured to meet tenants' needs, he says. Computer-aided drawings make it easy to generate space plans that illustrate how the new space will look and feel.

In today's market, “Tenants dictate exactly what they want,” and they are willing to pay for it if they have to, Marquardson says. Overall, improvement costs are going up. “Many owners are pushing those costs through to the tenant as part of their buildout cost,” Spizer says. “While allowances are increasing due to the competitive economics of office deals, tenants are still having to come out-of-pocket and pay for a portion of the buildout or at least amortize it on top of their rent.”

But tenant expectations vary from market to market. In Knoxville, Tenn., more tenants expect landlords to provide turnkey offices for new leases so they don't incur any out-of-pocket improvement costs, says Louise R. Fogarty, CCIM, CPM, leasing manager for Blue Ridge Development. “This is a more common concession than offering free rent or a reduction in the rental rate,” she notes. “Tenant improvement allowances are usually in the $12 per square foot to $20 psf range, but a turnkey buildout can average $22 psf to $32 psf depending on the level of finishes, so this can be a significant concession.”

No matter how the space is configured and who pays for improvements, leases should be as flexible as possible. Tenants are cautious about making long-term leasing decisions, especially until the economy stabilizes. They want “the flexibility to cancel or downsize, even if they have to pay a penalty to do so,” Fogarty says.

Moving Toward Open Space

Office design today is about efficiency, flexibility, and shared spaces. Tenants seek higher-density offices with communal areas, open space, and fewer private offices. “Tenants want anything that will make their operation more efficient,” says Michael Hickok, a partner at Hickok Warner Cole Architects in Washington, D.C.

As a result, function drives form, mainly due to the evolution of modern workplaces. One obvious manifestation of this is shrinking private office space. Today, the types and sizes of private offices increasingly are determined by the tasks that need to be completed, Orr says. It's not who you are; it's the work you do.

Past indicators of success, from the executive washroom to the big corner office, don't have the same cachet today. “After the Enron fallout and general falling corporate credibility, companies want to look lean and mean,” Marquardson explains.

For example, a decade ago, law offices averaged 1,400 sf per attorney, but today they are less than 700 sf, says Ronald W. Russell, CCIM, CPM, president of Ronald W. Russell Real Estate in Philadelphia. Some of this can be attributed to technological advances. LexisNexis databases have replaced space-consuming law libraries, and computer-savvy attorneys do a lot of work that previously they assigned to assistants; thus, several attorneys now can share one assistant.

Private offices aren't just getting smaller; many are being replaced by common spaces. A few years ago, architects designed buildings that maximized the number of corner offices, Hickok says. But today, simple rectangular floor plans are more popular, as they represent opportunities for more effective use of the space. “We are seeing more huddle rooms, large break rooms, and conference rooms in the prime corner locations,” Spizer says. This efficient style holds down rental costs, while encouraging employees to work together in central shared spaces.

Many tenants also want designs that allow for centralized support services such as copying and faxing centers, kitchens, and mail areas to encourage employees to come out of their offices, increasing incidental contact and communication. Managers want to be in a more open environment where they can see and be part of the interaction; they view themselves as part of the workplace community, not outside of it. “The sociology is really changing our interiors in corporate America,” Surratt says.

Perhaps to make up for the lack of private offices, phone booths — small private spaces where employees can make phone calls — are popping up. Hoteling, or providing plug-and-play stations for shared use, also is gaining popularity. Employees who travel, telecommuters, and others simply can set up shop at a desk for a day or a week. Economically, dedicated spaces for people who may be in the office only a few days a month don't make sense, Surratt says.

One of the most significant drivers of the move to open, functional work spaces is the information technology revolution. Conventional dial-up access is out. “Tenants are demanding high-speed Internet access, at least digital subscriber lines and preferably T1 lines,” Spizer says.

Many tenants aren't content with one Internet service provider; they want a choice of at least three providers, Russell says. And some ask for secure fiber-optic access because they don't want it to come up through a public area, Orr reports.

Technology needs vary widely: Some tenants want a complete plug-and-play setup, with access costs built into the rent, Marquardson says. On the other hand, some tenants complain about having to go through the property manager for Internet access, Hobbs says. Wireless offices are the next frontier. “As we move forward, tenants will demand wireless access, but most markets aren't there yet,” Spizer says.

Interestingly, while IT access demands are on the rise, support services, such as server rooms, are increasingly located off site, further reducing many tenants' need for office space.

Taking Care of Business

Tenants increasingly want landlords to anticipate what they want — ranging from secure environments to nearby restaurants to clean, comfortable workplaces — and to solve their problems as quickly as possible. Tenants have a greater awareness of landlords that take care of their lessees and those that demonstrate a give-and-take attitude. Landlords with reputations of being inflexible frequently eliminate themselves from the competition.

Security. Experts are divided on how much security matters to today's tenants. To some extent, location and type of business dictate the level of concern. Overall, though, security influences tenant decisions only minimally, says John A. Gates, president of southwest corporate services for the Staubach Co. in Addison, Texas.

Nevertheless, many tenants are more sensitive about security issues. “In light of the heightened threats of Sept. 11, 2001, tenants want to know how the landlord is protecting the building,” Spizer says. Even in Raleigh, potential tenants want to know the protocol for shutting down a building's fresh air intakes, Hobbs says.

Across the board, the security tenants can see is what really matters. For instance, lobby security is becoming more important, Hickok says. Most Philadelphia office high-rises have enhanced lobby security, including visitor sign-in sheets, but there isn't much additional concern in the central business district, Russell says. Connected covered parking also is becoming more important for employee safety, Spizer says.

Key cards are increasingly de rigueur. As more tenants want 24/7 access, the use of a single key card for both parking and building access is more important.

Amenities. While they carry less weight than during the dot-com boom, amenities still can provide an edge. “Having on-site food services, banking, health-club facilities, and gift shops certainly can have an impact on the decision to locate in a certain building,” Fogarty says.

Restaurants also are popular in both urban and suburban settings, with one caveat: Tenants don't want food-preparation smells wafting into their offices, Marquardson says. But whether the restaurants are inside or nearby, ready access to food is important.

Redundant Power. Tenants now demand multiple power sources to ensure reliability due to the increased use of sophisticated technology.

A common solution is connecting each building to two separate grids: If one goes down, the other provides a backup power source. In some office parks, different areas are connected to different substations. The ideal is a site served by multiple providers, says Jay Ballou, a senior vice president at WorkPlaceUSA. He has placed clients in facilities that have dual feeds — one from nuclear, one from gas.

Generators are helpful for small outages; however, it's unusual for a building developer to provide enough emergency backup for more than a few minutes, Ballou says.

Maintenance and Operations. From office temperature to elevator speed, tenants want a problem-free environment. But if problems do happen, they want them resolved quickly.

One trend helps address this demand: online notification systems through which tenants can report problems and track response status, Ballou says. Such sophisticated approaches not only speed the process but also are a big plus, especially regarding tenant retention.

Three maintenance and operations complaints dominate: heating, ventilation, and air conditioning; cleanliness; and elevators.

Most HVAC-related complaints concern temperature. Proper airflow and equal distribution is the most important operating issue, explains Brian D. Lee, managing director with Insignia/ESG in Long Island, N.Y. Tenants want to manage their own office temperatures, including running the air-conditioning system after business hours at reasonable rates, Russell says.

A related concern is air quality. Proper ductwork is essential, Lee says. Adding flex ducts and diffusers to existing ductwork in renovated space can lead to inadequate airflow and tenant discomfort. “In this case, what you can't see can hurt you,” he warns. Building managers should provide the protocol for indoor air quality when they are showing space to potential tenants, Russell advises.

Lack of cleanliness also can drive tenants away. Common area bathrooms should be cleaned three times daily and day porters should spot clean the lobbies and other common areas, Lee says.

Elevator performance is high on many tenants' lists as well. A long wait to go up is a quick way for a landlord to go down in a client's estimation. Floor-to-floor travel time, door opening and closing speeds, and the number of elevators matter most, Russell says.

Decision-Making Intangibles

Many experts stress the intangibles involved in the decision-making process, and the most important is reputation.

“Quality of landlord enters into the decision,” when 30 properties meet the basic specs, Marquardson says.

Russell agrees, although he's never had a client express interest in a building simply because of the management company or ownership. If all other factors are equal, and the decision is between two buildings, he suggests clients choose the one with a stable ownership history.

However, it's often not the good reputation tenants remember. Certain buildings, owners, and property management companies develop reputations for having problems. “A good reputation may not help you, but a bad one will kill you,” Russell warns.

Reputation isn't the only intangible that influences tenants looking for office space. More than ever, “first impressions are absolutely huge with tenants,” Ballou says. For instance, while curb appeal and landscaping rarely rank high on a tenant's must-have list, a potential site can fall out of favor if the grass is dead or the sidewalk littered. A poor first impression can be costly when a tenant has 20 options instead of two.

That first visit carries a lot of weight. “When you get a client in front of you, you may only get one shot,” Marquardson cautions.

Roxanna Guilford-Blake

Roxanna Guilford-Blake is a free-lance writer based in Decatur, Ga. Affordable Seniors Housing Although development of affordable seniors housing is increasing, simply not enough exists nationwide. Unsurprisingly, most of the affordable seniors-housing options are those offering the fewest amenities and services — seniors apartments. About half of these are classified as affordable because they participate in various tax credit programs, according to Seniors Housing Finance: Trends & Prospects, an American Seniors Housing Association report. Cooperatives offer an affordable option for independent seniors, according to Douglas M. Kleine, executive director of the National Association of Housing Cooperatives. And the projects can be easier for developers. “What helps make co-ops more affordable is that there is a single mortgage, rather than 100 different ones, and the purchase of shares in a co-op is a personal property transaction like buying a car in most states,” he explains. “Local governments may kick in some money or land in return for a promise built into the co-op\'s bylaws to keep the co-op shares affordable.” However, the bulk of new development markets to higher-income seniors, says Robert M. Stone, CCIM, a senior vice president in the senior-housing and multifamily divisions of the Henry S. Miller Commercial Co. in Dallas. Given the additional operating costs involved in most areas of seniors housing, “it requires a subsidy to build a product that meets the needs and is affordable,” he says. Religious and other nonprofit groups are leading the development effort, observes David W. Stolte, director of the senior- and affordable-housing divisions of the Charles Dunn Co. in Irvine, Calif. They are encouraged by low-income financing incentives strictly for nonprofit organizations, says David B. Dill, CCIM, CPM, president of Cascadia Pacific Developments in Vancouver, British Columbia. For example, the Department of Housing and Urban Development\'s Section 202 program for affordable seniors housing is available only to 501(c)(3) nonprofits. Low-income housing tax credit programs are available, but they can be challenging. Seniors-only apartment projects have to compete with family projects for the same credit allocation, and although the credits offset federal income taxes, the programs are managed by the states, Stone warns. “There is not much consistency from state-to-state as to which types of projects get funded.” Similarly, local governments may offer various incentives to encourage affordable CCRCs, according to ASHA. Government-sponsored enterprises such as the Federal National Mortgage Association and the Federal Home Mortgage Corp. remain promising capital sources. And new loan programs may make it easier for seniors to afford market-rate and higher-cost housing. For example, Grannie Mae, a non-government-sponsored loan program, entered the market at the end of 2002. It uses a reverse-mortgage concept with an unsecured line of credit to help close the gap between a resident\'s income and the cost, according to Stone. After debuting in Virginia and Maryland, the program will expand to other states, he says. Assisted LivingThere\'s an acute need for affordable options in the assisted-living sector, as many people can\'t afford the steep monthly fees of these facilities, but need the extra care. One approach to affordable assisted living is using programs not specific to assisted living. For instance, Section 42 low-income housing credits can cut the cost of the apartment-rental portion of an assisted- living community, says Len P. Deering, CCIM, of GMAC Commercial Mortgage in Chicago. “Add in many other sources of money, such as HOME funds and grants, and even more people can qualify due to the reduced rental costs,” he says. Some developers have used HUD\'s Section 232 full-insurance Multifamily Accelerated Processing to help gain financing for assisted-living facilities, according to ASHA. Tax-exempt bond financing may be an option where there\'s clear need, but given problems in the assisted-living sector, “bond rating agencies and bond-fund managers predictably continue to struggle with pricing and other issues,” according to ASHA. Some states now allow Medicaid to be used in conjunction with assisted living. This allows seniors with little money to receive limited care without entering a full-scale nursing home, which could be twice as expensive, Deering says. Sources of Funding • The Fair Housing Administration provides fixed-rate loans for construction that transition into long-term financing. “The loan is non-recourse for the construction phase and permanent term of the loan,” explains Len P. Deering, CCIM, of GMAC Commercial Mortgage in Chicago. • The Federal National Mortgage Association and the Federal Home Mortgage Corp. are the best lending options for seniors apartments and assisted-living properties that have an independent- living component, Deering says. Their interest rates and terms are the best in the market for stabilized and seasoned properties. However, Fannie Mae and Freddie Mac provide construction- forward programs for seniors apartments, but not other forms of seniors housing. • The Department of Housing and Urban Development still is financing free-standing assisted- living developments under the HUD Section 232 program, but it\'s hard to jump through the hoops, says Robert M. Stone, CCIM, a senior vice president in the senior-housing and multifamily divisions of the Henry S. Miller Commercial Co. in Dallas. “During the past 12 to 18 months the project qualification parameters have become more difficult for developers to meet because of HUD\'s interpretation of market study and appraisal assumptions,” he says. • Securitized financing has dried up, except for independent-living facilities and seniors apartments. However, real estate investment trusts still will do sale-leaseback and sale-manage-back transactions with existing clients that have proven operational experience, according to Stone. • Some local banks provide financing for various seniors-housing segments, whether the properties are stabilized or new construction, Deering reports. These loans normally require personal guarantees by the owners and generally are short-term loans in the three-to-seven-year range. • “Bank financing and bridge loan sources provide the best acquisition financing alternatives in today\'s market for most seniors-housing property types,” Stone adds. • “Wall Street conduits have little interest in seniors housing beyond seniors apartments,” Deering notes. “The rest of the seniors-housing segments have too much of a business-income component for their lending requirements.” University of Minnesota, Environmental Health and Safety Indoor Fungi Resourceswww.dehs.umn.edu/iaq/fungus Washington State Department of Health, “Is Indoor Mold Contamination a Threat to Health?”www.doh.wa.gov/ehp/oehas/mold.html  

Recommended

Crowd Control

March.April.18

 

Read More

Upping The Ante

March.April.18

 

Read More

Multi-Service Properties Trend

July.August.17

 

Read More

Shrinking Footprint

Mar.Apr.17

The Upward momentum that commercial real estate prices and values have been experiencing has recently slowed relative to their appreciation trajectory since their amazing recovery starting two years after the credit crisis. Given the challenges in today's world and the many dynamics affecting commercial real estate, the economy, and the financial markets, it is time to fully understand the next phase of the current market cycle.

Read More